Cash Flow Statement

The balance sheet and profit and loss account are important accounting statements. But they do not contain a sufficiently wide range of information to enable users to make a full assessment of a company’s performance. Most specifically, an important gap is left because the profit and loss account provides financial information relating to only a limited range of financial transactions entered into during an accountant period, namely those which impinge on the calculation of reported profits, i.e. revenues and expenditures. Other transactions involving flows of cash, such as an issue of shares or debentures or the purchase of a fixed asset, are not reported in the profit and loss account since these are capital transactions. The view gradually developed that capital inflows and outflows, which often involve large amounts of money, should be reported to investors and the cash flow statement was devised to provide this information. FRS1, entitled “Cash Flow Statements”, makes publication a requirement. The statement must contain full details of the cash inflows and outflows which have taken place during an accountant period, and it is thought that the information it contains, when used in conjunction with other details in the corporate report, will help bankers and other users when they assess:

• An enterprise’s ability to generate positive future net cash flows.
• Whether an enterprise is likely to be able to meet its financial obligations.
• The effect on the enterprise’s financial position of investments undertaken during the accounting period.
• The reasons for differences between profits and cash flows arising from normally operating activity.
• The value of a business as the statement provides a useful input for business valuation models based on estimates of likely future cash flows.

All enterprises are required to present a cash flow statement that reports cash flows during the reporting period, classified as follows:

Operating activities: Principal revenue-producing activities and other activities that do not include investing or financing activities.

Investing activities: Acquisition and disposal of long-term assets and other investments not included in cash equivalents.

Financial activities: Activities that change the size and composition of the equity capital and borrowings.